Although banking shares fell, the main fallers were mining and energy companies after gloomy economic reports from China, Europe and the United States.

Fears of slowing demand pushed Brent crude in London, which has been trading over $100 a barrel for most of the past year, fell below $89.

Oil group Petrofac was the biggest faller down 3.6pc, miner Vedanta dropped 3.4pc and Eurasian Natural Resources lost 3pc.

In America, the Dow Jones slid almost 2pc while in Asia, the Hang Seng fell 1pc and the Nikkei fell 0.2pc. Traders are fretting about the prospects for global growth in the wake of weak manufacturing data from the US, Europe and China on Thursday.

Losses on Wall Street worsened after a bearish call from Goldman Sachs, which advised clients to bet on further falls ion the S&P 500 index on expectations of more weakness in the economy. Also weighing on sentiment was the US Federal Reserve's light-touch stimulus on Wednesday with concerns that it would not be enough to boost the stuttering economy.

"With signs of weakness in the US economy, the persistence of the eurozone debt crisis and the threat of a hard landing in China looming, the prospect of a synchronized economic slowdown is real," analysts at DBS Bank in Singapore said.

All four of Britain’s leading high street banks had their long-term ratings cut by Moody's. The credit ratings agency cited risk exposure and the eurozone crisis for it downgrade of 15 of the world's largest financial institutions, including Goldman Sachs, Barclays, Citigroup, and Deutsche Bank.

Among the British banks, Barclays, which initially fell 3pc, was down just 0.3pc within half an hour of trading starting in London. RBS and HSBC fell 0.3pc and 0.4pc respectively, while Lloyds shares were largely unchanged.

Traders said the markets have been expecting the downgrades since February, when Moody's said it had launched a review of 17 major banks.

Barclays had its credit rating cut by two notches from A1 to A3, while HSBC, Britain’s largest bank by market capitalisation, saw its rating cut one notch from Aa2 to Aa3.

RBS’s rating was also cut one-notch from A2 to A3 while Lloyds was served a one-notch cut in its rating from A1 to A2. Lloyds’s short-term funding remained unchanged, which means the bank’s downgrade will not hurt UK borrowers.

In a statement Lloyds, which is Britain’s largest retail bank, said: “We believe this change will have limited impact on our funding costs and market capacity.”

While RBS said it "disagrees with Moody's ratings change" which it felt was "backward-looking and does not give adequate credit for the substantial improvements the Group has made to its balance sheet, funding and risk profile".

In Europe, Frankfurt's DAX 30 fell 1.1pc to 6,270.92 points and in Paris the CAC 40 lost 0.9pc to 3,084.20. Spain's Ibex and Italy's MIB slipped 0.7pc and 0.5pc respectively.

Later today the leader of Germany, France, Italy and Spain meet in Rome to discuss the eurozone debt crisis.